Market Analysis in 4 Steps

Understanding your customers is the key to success for any startup. If you don’t have a deep understanding of who your customers are, you’ll have trouble developing products that truly fit their needs, and you’ll struggle to develop a successful marketing strategy.

This is where a market analysis comes in. It may sound like a daunting and complex process, but fortunately, it’s not.

A market analysis consists of four parts:

Industry overview: You’ll describe the current state of your industry and where it is headed.

Target market:Who are your actual customers? You’ll detail how many of them are there, what their needs are, and describe their demographics.

Pricing and forecast:Your pricing will help determine how you position your company in the market, and your forecast will show what portion of the market you hope to get.

Whether you are writing a Lean Plan or putting together a detailed business plan for a bank or other investor, a solid market analysis is expected. But, don’t just do a market analysis because you’re developing a plan. Do it because it will help you build a smarter strategy for growing your business. Once you have in-depth knowledge of your market, you’ll be better positioned to develop products and services that your customers are going to love.

Now, let’s go into each step in more detail so you know exactly what you need for your market analysis.

Step 1: Industry overview

In this step, you’ll describe your industry and discuss the direction that it’s headed. You’ll want to discuss key industry metrics such as size, trends, and projected growth.

Industry research and analysis is different than market research. When you’re researching your industry, you’re looking at all of the businesses like yours. This is different than market research, where you are learning about your customers. For a more detailed explanation of the difference, check out our article on the differences.

Your industry overview shows investors that you understand the larger landscape that you are competing in. More importantly, it helps you understand if there’s going to be more demand for your products in the future and how competitive the industry is likely to be.

For example, if you are selling mobile phones, you’ll want to know if the demand for mobile phones is growing or shrinking. If you’re opening a restaurant, you’ll want to understand the larger trends of dining out. Are people eating at restaurants more and more over time? Or is the market potentially shrinking as consumers take advantage of grocery delivery services?

Step 2: Target market

Your target market is the most important section of your industry analysis. This is where you explain who your ideal customer is.

You’ll detail:

Market size: Unlike industry size, which is usually measured in dollars, your market size is how many potential customers there are for your product or service. We’ve got a great method for figuring out your market size that you can read about here.

Demographics: Describe your customer’s typical age, gender, education, income, and more. If you could paint a picture of your perfect customer, this is where you’ll describe what they look like.

Location: If you find your customers in a specific location or region, describe that here.

Psychographics: Describe your customer’s likes and dislikes. A better way to think about psychographics is to think about your customer’s lifestyle and personality.

Behaviors: This is essentially an extension of some of your psychographic information. Explain how your customers shop for and purchase products like yours.

Trends: Customer behavior is always changing. If there are trends that you’ve noticed with your target market, detail them here.

It’s O.K. if you have different types of customers. When you have more than one type of customer, you do what’s called market segmentation. This is where you group similar types of customers into segments and describe the attributes of each segment.

Step 3: Competition

Your market analysis isn’t complete without thinking about your competition. Beyond knowing what other businesses you are competing with, a good competitive analysis will point out competitors weaknesses that you can take advantage of. With this knowledge, you can differentiate yourself by offering products and services that fill gaps that competitors have not addressed.

When you are analyzing the competition, you should take a look at the following areas:

Direct competition: These are companies that are offering very similar products and services. Your potential customers are probably currently buying from these companies.

Indirect competitors: Think of indirect competition as alternative solutions to the problem you are solving. This is particularly useful and important for companies that are inventing brand new products or services. For example, the first online task management software wasn’t competing with other online task managers—it was competing with paper planners, sticky notes, and other analog to-do lists.

How you’re different: You don’t want to be the same as the competition. Make sure to discuss how your company, product, or service is different than what the competition is offering. For a common business type, such as hair salons, your differentiation might be location, hours, types of services, ambiance, or price.

Barriers to entry: Describe what protections you have in place to prevent new companies from competing with you. Maybe you have a great location, or perhaps you have patents that help protect your business.

The best way to research your competition is to talk to your prospective customers and ask them who they are currently buying from and what alternate solutions they are using to solve the problem you are solving. Of course, spending some time on Google to figure out what else is out there is a great idea as well.

Step 4: Pricing and forecast

The final step in a market analysis is to figure out your pricing and create a sales forecast to better understand what portion of the market you think you can get.

First, think about your pricing. Of course, you should ensure that your price is more than what it costs you to make and deliver your product or service. But, beyond that, think about the message that your price sends to consumers.

Customers usually link high prices to quality. But, if you are pricing on the higher end of the spectrum, you need to make sure the rest of your marketing is also signaling that you are delivering a high-quality product or service. From what your business looks like to its logo and customer service experience, high-prices should come with a high-quality experience during the entire sales process.

On the other end of the spectrum, maybe you’re competing as a low-priced alternative to other products or businesses. If that’s the case, make sure your marketing and other messaging are also delivering that same, unified message.

Once you have an idea of your pricing, think about how much you expect to sell. Your industry research will come into play here as you think about how much of the overall market you expect to capture. For example, if you’re opening a new type of grocery store, you’ll want to know how much people spend on groceries in your area. Your forecast should reflect a realistic portion of that total spend. It’s probably not realistic to gain 50 percent of the market within your first year.

However, don’t make the mistake of assuming that you can easily get 1 percent of a very large market. 1 percent of a 3 billion dollar market is still $30 million and even though 1 percent seems like a small, attainable number, you need to understand and explain how you will actually acquire that volume of customers.

When you build your forecast, use it as a goal for your business and track your actual sales compared to what you had hoped you would sell. Tools like LivePlan can help you automatically compare your forecast to your accounting data, so it’s easy to do. But, even if you use a spreadsheet, tracking your progress will help you adjust your business strategy quickly so that you can do more of what’s working and less of what isn’t.

Creating a good market analysis is a very worthwhile exercise. It will help you uncover your blind spots and prepare you to compete with other businesses. More importantly, it will help you understand your customers so you can deliver the best possible service to them.

Looking for some examples of market analysis? Take a look at our free sample business plans on Bplans. There are more than 500 of them across a wide range of industries, and each one of them has a market analysis section.